Giving Workers the Shaft: The Real Impact of Minimum Wage

June 27, 2013

Earlier this week, Senator Tom Harkin (D-IA) wrote an op-ed for Politico in favor of increasing the minimum wage. The op-ed, which targets an economically unsound principle, is filled with misleading attacks on those opposed to such an increase, as well as misrepresentations of the basics of economics.

First, the Senator tries to make opponents of the minimum wage look like flat-earthers:

…[Opponents] claimed that it would not work and that it would harm the people it was meant to help. Minimum wage opponents said that it would harm the economy and that it was antithetical to freedom and liberty; one adversary likened it to the fall of Rome. We know these predicted economic catastrophes did not come to pass.

Actually, the minimum wage is antithetical to freedom and liberty. Like any other federal law mandating regulations on vacation time, pay, and the like, there is no allowance for it in the Constitution. Furthermore, the relationship between employer and employee should just be that – between the two economic partners, without heavy-handed involvement by the federal government.

Furthermore, the minimum wage harms those it is intended to help. If the cost of employing someone is higher than the value they add to a company, they are not going to be hired. This deprives people entering the workforce after retraining and young people of first job opportunities, costing them precious work experience on their resumes. Additionally, raising the minimum wage devalues the dollar, and forces employers to raise the pay of higher-end workers who want their skill and experience validated.

The Senator next relies on an emotional pull for a point about how the minimum wage hurts poor families:

…[A] single parent with two children — who works a full-time minimum wage job — falls $3,000 below the poverty line. It is simply wrong that in a nation as rich as ours, people who go to work every day are unable to put food on the table, pay the electricity bill or keep up with the rent.

James Sherk and Rudy Takala decimated this argument back in March, over at the Heritage blog:

President Obama argued in his State of the Union address that “no one who works full-time should have to live in poverty.” That is a noble goal, but it has little to do with the minimum wage rate.

Only 2.9 percent of U.S. employees work for the federal minimum wage of $7.25 per hour. Very few of those fit the stereotype the President painted. Less than a quarter of minimum wage workers live at or below the poverty line, while two-thirds come from families above 150 percent of the poverty line. In fact, the average family income of a minimum wage worker exceeds $53,000 a year.

How do workers making $7.25 per hour live in families making over $50,000 a year? Because most of them are not the primary income earner in their families—many are students. Over half of minimum wage workers are under 25, and better than three-fifths of those report being enrolled in school. Two-thirds of minimum wage employees work part time.

They also identify the real problem in today’s economy (emphasis added):

The larger problem facing poor families is a lack of employment opportunities. Only 9 percent of individuals in poor families work full time, while 25 percent work part time. Fully 67 percent do not work at all.

Regarding how the poor live – unable to put food on the table, etc. – take a look at the paper Heritage policy experts Robert Rector and Rachel Sheffield wrote in 2011 on how the poor live. Short version: The Senator’s hyperbole is just that, since as of 2005 99.9% of the poor had refrigerators, 68% had personal computers, and 77.8% had more than one TV.

Moving on, the Senator claims a study from the far-left Economic Policy Institute shows “raising the minimum wage to $10.10 per hour will increase the gross domestic product by nearly $33 billion over the course of three years as workers spend their raises in their local businesses and communities. This economic activity will generate 140,000 new jobs over the same time period.”

This argument is an absurd (but common) one by those who want bigger government. Back in 2007, when then-Senator Hillary Clinton visited my alma mater during her presidential campaign, I asked her about the minimum wage and its negative effects on the value of the dollar and the unemployed. (The question starts at 6:10 of the video, and her answer to it comes at 1:05 of this video.) She stated it gives people a “floor” at which to start their climb up the economic ladder.

Economics professor Casey Mulligan destroyed this hypothesis in 2010, noting that 500,000 jobs had been lost due to the last minimum wage increase. And as Sherk and Takala highlighted, the real problem in today’s economy is lack of employment opportunities. With the right policies in place, this country could be adding 10 times as much growth in a single year as Senator Harkin claims a minimum wage hike would add. Furthermore, let’s be honest: while $33 billion sounds like a lot at first glance, it’s a tiny fraction of the size of the American economy. Our economy will produce well over $48 trillion in three years – and $33 billion is .00007% of $48 trillion.

Second, again at first glance, 140,000 jobs in three years sounds good. But that’s only 3,889 jobs per month for three years. That also assumes jobs would actually be added – which, as described above, simply wouldn’t happen.

The Senator’s points also assume employees utilize their money better than employers. Shifting money from employers to employees via government fiat does not change the amount of money in an economy – and, in fact, it could cause harm by further incentivizing the American economy to be reliant on consumer spending instead of saving, investment, etc.

Senator Harkin may be entirely sincere in his wish to help the American economy grow, and help workers find jobs. But the minimum wage does just the opposite. The Senator should instead support eliminating harmful regulations, reforming the tax code, and lowering spending.

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Earlier this week, Senator Tom Harkin (D-IA) wrote an op-ed for Politico in favor of increasing the minimum wage. The op-ed, which targets an economically unsound principle, is filled with misleading attacks on those opposed to such an increase, as well as misrepresentations of the basics of economics.
First, the Senator tries to make opponents of the minimum wage look like flat-earthers:
… claimed that it would not work and that it would harm the people it was meant to help. Mi read more >